The idea that Barclays may be able to persuade strategic partners to invest at a premium is poppycock

Monday 16 June 2008 23:00 BST

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Has Barclays found a better way of restoring balance-sheet capital than its rivals by going the strategic-investor route? The rights issues pursued by Royal Bank of Scotland, HBOS and Bradford & Bingley have been deemed such a destabilising influence that the Chancellor has asked the Financial Services Authority to examine the whole business of whether pre-emption rights best serve corporate Britain's capital raising needs. Meanwhile, the FSA has itself announced a crackdown on short selling around rights issues.

By placing new shares with sovereign wealth funds, Barclays hopes to avoid the pitfalls suffered by others. John Varley, the bank's chief executive, also hopes that by pursuing strategic investors in preference to a rights issue he will be sending out a clear message to markets. Unlike rivals, Barclays is said to be raising new capital to support opportunities for growth rather than to address past failings.

Yet despite the upbeat trading statement issued yesterday, the case can as easily be argued the other way around. The suggestion from competitors is that Barclays is following this route out of necessity rather than choice. According to this line of reasoning, in tapping SWFs for £4bn, Barclays is raising what it can rather than the somewhat larger sums it really needs.

You have to be a bit of a conspiracy theorist to buy this argument, but it goes something like this. The reason why Barclays has not been as trenchant in writing down mortgage-backed securities, leveraged loans and monoline exposures is that it cannot afford to without further damaging already wafer-thin capital ratios.

If it were to launch a rights issue for a larger amount, it would have to be more forthcoming on kitchen-sinking these bad debts. It would also have to admit the true reasons for it raising capital. Misplaced pride is preventing this recognition of the truth.

As it is, Barclays appears to have the mindset of a bank still living in the boom conditions of a year ago. The implication of the trading update is that things are now picking up again nicely, with the run-rate on profits pointing to an increase in earnings this year, rather than the sharp deterioration expected by the stock market. Someone has got it badly wrong. Which is it?

As ever, the truth almost certainly lies somewhere in-between. By opting for a share placing and open offer, Barclays both avoids a rights issue and honours the principle of pre-emption rights. By restricting the issue to less than a third of capital, it also avoids a shareholder vote and any awkwardness this might generate.

The idea that Barclays may be able to persuade its strategic partners to invest at a premium is nonetheless almost certainly poppycock. China Development Bank and Temasek have been profoundly embarrassed by the losses they have sustained by investing in Barclays as strategic partners at the top of the market a year ago. They are not open to persuasion in paying a premium this time around. Nor would anyone else be in these markets.

Why would anyone want to pay more than they can buy the shares for on the open market, unless it is for outright influence or control? Mr Varley, I'm assured, is not about to sell Barclays' independence down the river. The rules do not allow such large placings at a discount of more than 10 per cent without triggering a rights issue. I'm guessing this is about where the price differential will lie.

The amount of money raised will be enough to restore capital ratios to levels regarded as reasonably safe without being so large as to smack of panic. As for writedowns, Barclays remains adamant that the quality of its assets is superior to those of its rivals. There is therefore no read across from, say, the Royal Bank of Scotland impairment charges to its own. The older vintage of the Barclays' portfolio of mortgage-backed securities is said to make it inherently less risky than rivals.

We'll have to wait and see who the strategic partners are, and what the business case is for their involvement. Yet unless the investment purpose is overtly passive, such arrangements nearly always end up untenable in either outright takeover or unhappy divestment. Mr Varley seems neatly to be avoiding the embarrassment suffered by others that have sought new capital from their existing shareholders, but he may only be storing up problems for the future in bringing partners on board.